Question

Masters Corp. issues two bonds with 15-year maturities. Both bonds are callable at $1,045. The first bond is issued at a deep discount with a coupon rate of 5% to yield 11.6%. The second bond is issued at par value with a coupon rate of 12.50%

a. What is the yield to maturity of the par bond? (Round your answer to 2 decimal places.)

b. If you expect rates to fall substantially in the next two years, which bond would you prefer to hold?

Chose one: Bond with a coupon rate 12.50% or Bond with a coupon rate 5%

Answer 1

A: the yields to maturity of the par value bond will be equal to its coupon rate which is 12.5%.

B: if I expect the rates to fall substantially I will hold on to the par value bond. This is because it is paying a higher coupon than the discount bond. Hence its prices will fall lesser than the discount bond.

Select Bond with a coupon rate 12.50%